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Lawyers are regularly brought in to solve problems after they arise. For years, however, I have been advising boards to avoid the expense of fixing a problem by recognizing the possibility that a problem is brewing and dealing with it before it becomes time-consuming and expensive and takes on a life of its own.
A “warning sign” does not mean that the co-op or condo is in trouble, but, like an amber light, it is a signal for the board to slow down and examine the potential for a problem. After all, there is a saying that “a stitch in time saves nine.”
It is also important to note that having a warning sign occur in your building does not mean that a board or its managing agent has done anything wrong; sometimes it is just a result of bad luck, the normal life cycle of real estate and related facilities, the government changing the law or regulations, or a court decision that changes the way a document or action has been interpreted in the past. If your co-op or condo has to deal with any of these things, it is always better to take care of them as expeditiously as possible, which frequently means as inexpensively and efficiently as possible.
The following is a list of questions that will enable your board to determine if there are issues that should be investigated further. Each question is followed by the reason behind it, which will enable your board to do a self-assessment. If the answer to one or more of the questions is yes, then the board should examine whether it is an aberration or the sign of a more serious problem. Alternatively, the affirmative answer may prove to not be a warning sign.
Has your co-op or condo been involved in multiple lawsuits? Multiple suits could represent an overly aggressive board, disturbed owners, a fee-hungry lawyer, or a building having multiple problems. A positive answer to any one of the questions would indicate a problem. However, it could also be bad luck, because litigation is frequently expensive and time-consuming and should be limited to when it is essential.
Have you had your proprietary lease and bylaws updated? As a result of the huge increase in co-ops and condos, there has been an increase in litigation and legislation, all of which has to be factored into the co-op or condo’s organizational documents or the board risks judgments or fines against it. If it has not been done in a decade, do it now. This is not so much a warning sign as a warning that updating your documents could avert a disaster waiting to happen. In addition, the sponsor’s attorney did not really consider your operating issues when he attached the documents to the offering plan, and now you have to live with them.
Do your board meetings take more than two hours a month? A well-run building should not have regular long meetings, which are debilitating for the board and management. If the meetings are dragging, either the board is dealing with too many issues or nothing is being accomplished – or there are other serious problems. If you find that you tackle the same issues meeting after meeting, the problem could also be lack of follow-up. It is one thing for a specific meeting (e.g., the budget meeting) to take longer, but a monthly board meeting should not take more than two hours.
Are your annual meetings disrupted by angry owners? Having an occasional proxy fight at the annual meeting or arguing among the owners is not a concern, but if it occurs every year or the meeting becomes a war zone, then it could indicate a problem. Although there are unhappy people everywhere, it might help to survey your residents and find out what is bothering them. I have learned from my years off the board that frequently the staff treats the board members differently than the other residents, so there could be problems about which even the most proactive board does not have knowledge.
Do you receive your audited financial statements within four months of the year’s end? Accountants are all very busy in the first quarter getting the tax returns filed and the financial statements completed, but if year after year the financial statements are delayed, then the problem may be more serious than overwhelmed accountants. By the way, the problem may not be your accountants completing the audit but their concerns over what they found or their inability to have their questions answered. Of course, the problem could be understaffed accountants, which also needs to be rectified.
Does the board control the co-op or condo’s reserve funds? The board should control the reserve funds in order to be aware when the funds are being drawn and to know if the co-op or condo is exceeding its budget. Unfortunately, there have also been instances where a board member has utilized the reserve funds for his or her own needs, so the release of the reserve funds should require the signature of more than one board member.
Does your co-op or condo owe interest or penalties for unpaid taxes, or is it required to pay late fees to vendors or contractors? Although we are living through an environment in which the city is raising real estate tax assessments to offset other lost revenues, if the co-op or condo is forced to pay late fees and interest, which are exorbitant, then it needs to re-examine the budget. Moreover, if vendors and contractors are not being paid on time, they may charge your building a premium in the future or their bills may be “falling through the cracks,” which is something else that needs to be examined.
Are the public portions of the building dirty? Does the building have mold? Are there mice or rats visiting apartments? These are all signs that the building is not being properly maintained or some of your residents’ apartments are filthy and are attracting vermin. In either event, it must be investigated. There are few things as dangerous to the well-being of your residents as one or more of the residents hoarding or collecting debris in their apartments or having multiple pets that are not being walked outside. The list of what can cause vermin in the building is long but must be treated aggressively by management. Unfortunately, this becomes a problem in buildings with aging residents, and the board should have a plan for dealing with it.
Are many of your owners violating the lease, bylaws, or house rules? This could be a sign that the residents know that the board is weak and not enforcing the rules or does not care or, worse, the board members themselves are violating the rules. Any answer is wrong because the board has an obligation to provide each resident with the quiet enjoyment of his or her apartment and the board is obligated to adhere to the rules the same as any resident. The board should regularly review the house rules and make certain that they are still relevant and, if they are not, change them.
Are some owners being treated differently than others? There is nothing that creates dissension in a building more than if the board, the managing agent, or the building staff are treating owners differently. Moreover, the Business Judgment Rule protects boards, provided that the board members have not discriminated, involved themselves in self-dealing or bad faith, or acted in a way that benefits their friends over the other owners. Furthermore, anytime a board member has a personal interest in the outcome of a discussion, that person should recuse himself or herself and leave the room during the discussion.
Are your building’s maintenance and common charges increasing faster than those of neighboring buildings? There could be a rational reason, but it must be examined to determine if it is symptomatic of something more serious. As the city continues to increase its mandates and the price of fuel, utilities, and insurance continues to rise for reasons that are unrelated to the building, the cost of operating the building – and therefore the maintenance and common charges – will continue to rise. However, if one building’s operating cost per resident is increasing faster than the cost per resident in a comparable building, it needs to be reviewed and understood.
Are you re-doing alterations and construction in order to eliminate leaks or deal with other problems that never seem to abate? If this is the case, perhaps it is time to change engineers or contractors, or it could demonstrate a more serious physical problem. Identifying the cause of water infiltration is difficult, but the board cannot be expected to continue to pay for work that does not solve the problem. It could be that it is time to replace the roof rather than just make repairs, or that the flashing is bad, or the parapets porous. Whatever the reason, if the problem does not abate, perhaps it is time to bring in a second engineer. In one building that suffered years of endless leaks, it was ultimately discovered that there were nails in the roof under a staircase that were causing them.
Are building fire or health code violations continuously imposed against the co-op or condo? An occasional infraction is one thing, but constant or repeated violations demonstrate that something is wrong, and the board should find out what it is and correct it before something more serious happens. The city is constantly changing the codes, so something that was legal a few years ago could become a problem. Moreover, violations could be a sign that your residents or staff are not adhering to the rules.
Are the sales prices for apartments in your building significantly lower (i.e., more than 10 percent) than neighboring buildings? There can be a logical reason for the price differential or it could be that the market prices your building differently and, if so, it is incumbent upon the board to find out why and do something about it. The price of apartments is a result of market forces, and if the market is downgrading your building, you must find out why.
Are your professionals (attorney, accountant, managing agent, architect/engineer, or contractor) resigning your account? Now this is a serious problem because, let’s face it, professionals cannot stay in business if they regularly fire their clients. If the professionals are quitting, then there is something seriously wrong. It could be a demanding managing agent, which is a good thing, or it could be that they are not getting their questions answered, which is problematic. Either way, you need to know.
Are staff members filing grievance procedures against the co-op or condo on a regular basis? This could be a sign of an overbearing superintendent or one who wants to improve the appearance of the building and the quality of the staff. Be careful in investigating this warning sign because we all have favorite members of the building staff, and if we are siding with the doorman we like against the superintendent, we are undermining the superintendent’s authority, telling the staff that they do not have to listen, and depreciating the value of your investment. However, do not ignore it.
Are residents complaining about the managing agent? Be careful because the managing agent is usually attempting to protect the board and, like a good soldier, sometimes has to play the heavy with the residents, the staff, and the professionals in order to make certain that the building is properly run. Frequently, a staff member or resident with his or her own agenda wants to have the agent replaced or wants to be left alone, so the board has to make certain that there is a justification for the complaint, and frequently there is not.
None of the foregoing should be interpreted that it is time to abandon ship and move. However, they are warning signs and should not be ignored. They just require further investigation. Nevertheless, if there is a problem, remember the three E’s: acting Expeditiously is the most Efficient and inExpensive way of dealing with it.